Freddie Mac Ends Bond Broker Business

Freddie Mac (FRE), the No. 2 U.S. mortgage finance company, said on Monday it will no longer serve as a broker dealer in the multi-trillion-dollar mortgage bond market, a move some said is designed to lower risk and placate regulators.

The move away from buying and selling mortgage bonds to investors like Wall Street investment banks allows Freddie Mac (search) to refocus on its core business of acting as an intermediary between mortgage lenders and buyers of bonds pooling home loans, the company said.

Freddie Mac and its larger counterpart, Fannie Mae (FNM), have come under increased scrutiny from regulators and legislators for their attempts to cloak sharp volatility in earnings. Fannie Mae has recently become embroiled in its own accounting woes, reigniting calls for closer regulation of the housing agencies.

Last year, Washington DC law firm Baker Botts LLP criticized Freddie Mac's broker dealer business, known as the Securities Sales & Trading Group, for arranging two bond trades that "violated corporate tax guidance" as part of an effort by the company to massage earnings to provide the kind of smooth growth that investors like to see.

"It sounds like they are getting back to their core mandate," said Jeff Given, portfolio manager at John Hancock Funds. "It might be in response to regulators and the political environment which has been critical of the agency."

"My sense is that it is more in response to regulatory concerns, both existing and future (concerns)," said Bert Ely, of Ely & Co.

Created by Congress in the 1970s, Freddie Mac helps lenders find money on Wall Street by selling guarantees that ensure home loans will be paid on time. Loans with these guarantees are then resold into bonds called mortgage-backed securities to investors like pension funds, insurers and central banks.

Proceeds from these sales are then channeled to consumers via banks' mortgage loans to help them buy homes.

The 100 staffers at Freddie Mac's brokerage unit include traders and bond sales professionals as well as back office specialists who process the paperwork. The company did not say how many of these people would be retained by Freddie Mac.

Just how much this group contributed to Freddie Mac profits is also not known. "It is a unit within our mortgage securities operation. We don't break out the contribution of each unit to the company's bottom line," a Freddie Mac spokesman said.

Freddie Mac added that it would continue its support for the liquidity and depth of the market for its mortgage securities by purchasing them for its own portfolio, a key source of profits for Freddie Mac.

"The latest move by Freddie Mac does not affect its investments for its portfolio. You are taking a little bit of liquidity away from the mortgage bond market. But I am not sure it will have a big affect on the trading of Freddie Mac securities," Given said.

Liquidity is a measure of an investor's ability to readily buy and sell securities.

In early afternoon trading, Freddie Mac shares were up 9 cents or 0.1 percent at $67.31 on the New York Stock Exchange.